November 2017 Newsletters
by Victoria E. Stephen, Associate General Counsel
In the last hours of October 24, 2017, the U.S. Senate voted to repeal what many considered an onerous rule prohibiting arbitration agreements in the financial services industry and beyond, taking probably the most important step in the rule’s demise.
The “Arbitration Agreements” final rule was one of the jewels in the crown of the Consumer Financial Protection Bureau (CFPB). On July 10, 2017, the CFPB issued the 775-page final rule that effectively blocked the use of mandatory arbitration clauses that have come to be the norm in most financial agreements today. The Rule became effective September 18, 2017, but mandatory compliance was not required until March 19, 2018.
Earlier this year, the U.S. House of Representatives passed a resolution voting down the rule. The Senate vote was split right down the middle with Vice President Mike Pence becoming the tiebreaker, casting the final vote to allow it to pass 51-50. As of this writing, the last step is for President Trump to sign the reversal into law, which should happen swiftly in the coming days.
Those in support of the rule, including one of its biggest defenders, Democratic Senator Elizabeth Warren of Massachusetts, claim that it would protect consumers by allowing them to file class action suits directly against banks and other companies.
Those against the rule claim that it would actually harm the very consumers it was designed to protect by increasing the costs of products and services as result of banks having to defend expensive lawsuits. This is in addition to considering that class action lawsuits in general provide little restitution to plaintiffs, but excellent payoffs for plaintiffs’ lawyers. The CFPB’s own study showed that 87% of class actions provide absolutely no financial compensation to consumers. The lawyers, on the other hand, can make more than a million dollars per case on average.
Acting Comptroller of the Currency, Keith A. Noreika issued a statement along these lines, saying that the rule “would have likely increased the cost of credit for hardworking Americans and made it more difficult for small community banks to resolve differences with their customers without achieving the rule’s goal of deterring future financial abuse.”
The signaling from this move goes beyond saving banks from having to ban arbitration agreements. Despite much rhetoric of undoing an “unaccountable and unconstitutional” CFPB, the Trump administration has done little to make good on that promise in its first year…until now. This is the first major indication from the GOP that it is not timorous of the CFPB’s rule that has been all but untouchable in the Obama era. Time will tell whether this is a singular effort to prevent a particularly burdensome rule, or the beginnings of the President’s vow to “do a big number” on Dodd Frank.
Temporary Exceptions to Appraisal Requirements Granted
by Elizabeth K. Madlem, Associate General Counsel
On October 17, 2017, the Agencies (Federal Reserve System, FDIC, NCUA, and OCC) issued a Joint Press Release Regulatory Relief statement allowing for temporary exemptions to the Title XI of FIRREA appraisal requirements in areas affected by Hurricanes Harvey, Irma and Maria. This relief will provide some flexibility to appraisal requirements for financial institutions underwriting any real estate-related transactions in Florida, Georgia, Puerto Rico, Texas and the U.S. Virgin Islands. The disruptions to the real estate markets in those regions interfere with the bank’s ability to obtain appraisals that comply with the Title XI statutory and regulatory requirements. Additionally, recovery from these major disasters would be facilitated by exempting these transactions.
During this time period, financial institutions will remain consistent with the required safety and soundness concerns if they determine and maintain appropriate documentation of the following:
- The property involved was located in a major disaster area;
- There is a binding commitment to fund the transaction that was entered into on or within thirty-six (36) months of the date that the area was declared a major disaster;
- The value of the real property supports the institution’s decision to enter into the transaction; and
- The transaction must continue to be subject to review by management and the Agencies in the course of examinations of the institution.
Exceptions made pursuant to section 1123 of the FIRREA may be provided for no more than three years after the President determines a major disaster exists in a particular area. In all cases of recent disasters, the Agencies have determined that the exception provided will expire within three years after the declaration was made. For binding commitments to fund a transaction in an area declared a major disaster, the expiration is as follows:
- Texas – August 25, 2017, but no later than August 24, 2020;
- U.S. Virgin Islands – September 7, 2017, but no later than September 6, 2020;
- Florida and Puerto Rico – September 10, 2017, but no later than September 9, 2020;
- Georgia – September 15, 2017, but no later than September 14, 2020
- Puerto Rico – September 20, 2017, but no later than September 19, 2020; and
- U.S. Virgin Islands – September 21, 2017, but no later than September 20, 2020.
So what does this mean for financial institutions in these affected areas? During this window of three years, commitments to fund entered into on or within thirty-six (36) months prior to the declaration of a disaster area will not have to follow Title XI’s requirement of having appraisals be performed by appraisers according to its standards. Banks will need to document to show proof of the property meeting the time and location requirements. A copy of the Joint Press Release regarding these Temporary Exceptions can be found here, which outlines specific counties for states and municipalities for territories.
While the industry has been well aware of continual hot topics and new rules related to mortgages , fair lending data collection and overdrafts, one of the most rapidly prevalent topics in the industry today relates to preventing elder abuse. In 2016, the CFPB has issued an advisory related to preventing elder financial abuse. Back in 2013, federal regulators put out their interagency guidance related to elder abuse and its interrelation with privacy laws. A quick scan of the Department of Justice’s elder justice financial exploitation statutes will bring up no less than 149 statutes. Numerous publications (including this month’s C/A Access Magazine) have also brought this issue to the forefront. Following this trend, on October 18, 2017, the Elder Abuse Prevention and Prosecution Act was signed into law.
So what does the act actually do? First, it directs the Attorney General is to designate at least one Assistant US Attorney in each district to serve as Elder Justice coordinator. Additionally, the law directs both the Department of Justice and Federal Trade commission to have a designated Elder Justice coordinator. It also directs the AG to establish best practices across the board – for local, state and federal government. That includes a provision for the AG to create materials to assist states and local government in training related to elder abuse and to allow interstate initiatives so states can work together to combat these crimes. The Act mandates that federal agencies will work together to collect information on elder crimes. The Act also looks to the Director of the Office for Victims of Crime, the Comptroller General, the Department of Health and Human Services and law enforcement agencies to compile reports and submit suggestions as to improving victim services for victims of elder abuse and preventing the crime to begin with. The law enhances penalties for interstate telemarketing fraud for the elderly to include the forfeiture of any property taken under such a scheme. The law also takes aim at powers of attorneys and guardianships being used to exploit the elderly. One interesting note is that the Act calls for the AG to publish a model power of attorney for the explicit purpose of preventing elder abuse.
What does this actually mean for banks? There are no specific actions directed at financial institutions in this law. The requirements are directed at officials to create reports, rules and recommendations related to elder abuse under this act. This means you should be expecting more laws and more resources related to elder abuse across the board, including and especially related to, financial exploitation of the elderly. Financial exploitation is the most easily quantified abuse as the act cites more than $2.9 billion is stolen from the elderly pursuant to these crimes. Hopefully, it also means more resources to prosecute financial exploitation where the bank has reported on it pursuant to their state laws and bank policies and procedures.
You can find more the DoJ page related to financial exploitation here: https://www.justice.gov/elderjustice/prosecutors/statutes?field_statute_state=All&field_statute_category=All
by Victoria E. Stephen, Associate General Counsel
Customers sometimes, knowingly or not, spend more than they have in their account, and this is truer than ever as the holiday season approaches. As we know all too well, an "overdraft" happens when an account is debited for more than the balance, and banks typically a charge a fee for these, whether they pay them or not.
Whereas the norm used to be to individually decide whether to pay each of these overdrafts (so-called “ad hoc” programs), banks have increasingly taken a more systematic approach by creating prearranged overdraft protection products. The names vary widely among banks, but the product types generally fall into one of four categories:
- Overdraft transfers or sweeps
- Overdraft lines of credit (ODLOCs)
- Discretionary overdraft programs
- Automatic overdraft programs
While all four provide a means for paying items that otherwise would be returned or rejected, the recent regulatory focus has mostly been on the last of these—automatic overdraft programs. These programs typically rely on computerized decision-making with little or no case-by-case review.
With all of the other regulatory developments in the past few months, you might have forgotten that just back in August the CFPB unveiled a new “Know Before You Owe” overdraft disclosure. The new prototypes were a result of a simultaneously published study into “frequent” overdrafters, and found that banks are generally making a majority of their revenue income from overdraft and NSF fees. While these new disclosures are merely “prototypes” while the Bureau continues testing them with consumers, full implementation is scheduled to be on the 2018 agenda.
In its most recent Supervisory Highlights published this past September, the Bureau notes that certain institutions repeatedly engaged in deceptive acts or practices by misrepresenting their overdraft opt-in products, some examples of which include:
- Stating that the overdraft product applied to check, ACH, and recurring bill payment transactions, when it in fact did not.
- Asserting that the overdraft product would allow the consumer to withdraw more than the daily ATM withdrawal limit and be subject to only one overdraft fee when actually neither one of these were true.
- Disclosing that the overdraft product would take effect the day the consumer enrolled, when in reality it wouldn’t be effective until the next day.
The Bureau decided that these representations either misled or were likely to mislead a reasonable consumer about “material” aspects of the overdraft product. The CFPB made clear that providing new account opening disclosures or subsequent enrollment disclosures would not cure the misleading representations.
In light of these findings, here are a few reminders as we embark on this season of spending:
- Train staff to fairly disclose overdraft protection programs, including features, costs, terms, how to opt out of the service, consequences of extensive use, and any alternatives, especially ones more favorable to the customer.
- Disclose any time multiple fees could be charged per day, and clarify that these fees count against any overdraft protection dollar limit. When disclosing fees, rather than merely stating that the bank’s “standard fee will apply,” actually restate the amount of the fee.
- Explain the bank’s transaction clearing policies, and that transactions may not be processed in the order in which they occurred, which may affect the total fees incurred by the consumer.
- If possible, alert customers before an overdraft triggers any fees in a way that allows them to cancel the withdrawal or transfer before incurring the fee.
- Consider daily limits on fees; for example, consider a numerical limit on total overdrafts that will be subject to a fee per day, or a dollar limit on the total fees imposed per day.
Mark one thing off your list by keeping these in mind during your annual review of your overdraft policies and procedures.
By Chance Williams, Compliance Specialist
The Christmas season is upon us. For many this time of year is seen as a time for miracles and good cheer—unfortunately this is not the case for everyone. Many families at this time of year are facing hardship and starting to look ahead to the next year and what can be done differently to bring a more solid footing. This is no different for those customers who operate a family farm or ranch. This time of year it seems like there are always TV movies about a family facing a foreclosure on their family farm and they are praying for a Christmas miracle to save what their family has worked for decades to sustain.
As you can imagine many of these movies end with the family finding a way to save the family farm right at the last minute. While these are wonderful stories; reality isn’t always as predictable or kind. The truth is that for many family farm and ranch operations out there, foreclosure is a reality that must be dealt with. While many may not find themselves in a foreclosure situation they may need to restructure debt, change the way they operate, make changes to their lifestyle, or even sell off portions of excess assets. Customers who are thinking about selling off a portion of their assets should be encouraged by the institution to consult an accountant for potential tax liabilities as many times these customers will have taken section 179 deductions in the past to lower tax liabilities.
Changes are not always easy for a family to make and can result in undue stress. There are however a few considerations that can help to set their minds at ease. When a customer finds themselves in a situation mentioned above there are some steps the institution can set forth to assist the customer in preparing for the next steps.
When a customer is in a situation that can be troublesome a pro-active institution and lender can set forth the following steps to outline the customers actions. First, it is important for a customer to be prepared. To help a customer prepare the institution can inform the customer of their need to have detailed estimates of cost for the coming year, a realistic cash flow statement, and an estimation of family living expenses. Living expenses have gone up for a lot of self-employed customers over the past few years, especially health insurance, so an additional job with benefits is a huge advantage in helping the operation cash flow moving forward. Making a budget that includes farm/ranch expenses, farm/ranch income, other income/expenses, living expenses, and using a template such as IRS Schedule F is a great way to get started with estimating cost for the coming year. When reviewing the Schedule F, for proposed cash flow going forward, the institution should utilize an accrual basis as some expenses are prepaid and some income is deferred. Just using the Schedule F can be misleading. The budget along with a cash flow statement and the Schedule F will help to address any differences reflected from the previous year.
The institution should also run the cash flow to ensure the budget is capturing all potential short falls in operating cash from month-to-month. The institutions analysis of the dollars remaining or short from each month will let the customer know if they are going to need additional operating capital to finance the operation or living expenses. A solid cash flow should be created by projecting month-to-month cash in and out, considering the timing of cash in and out, taking the entire operation into account, and testing for potential decline in the market.
The second step to assisting a customer is to be honest. Honesty is important on two fronts. It is important that the customer is honest with the institution about the state of their finances as well as the state of their operation and the institution should be honest with the consumer as to what factors they see as detrimental. It is not always as simple as markets are down or production costs are high. It is many times the way that previous changes to the operation are now affecting the productivity.
When the institution is looking at the customers budget and considering the possible down-turn in markets they should consider the plan. When considering the plan the institution should look at the amount of experience the customer has, any rental or purchase agreements the customer has, additional capital means, additional collateral, and emergency situations that could affect the customer. While it is not always easy to be honest when discussing another person’s finances it is imperative the institution be as through and honest as possible.
Thirdly, an institution should instill accountability into their customers and be accountable to those same customers. When a customer is accountable for their operation and their livelihood they will be more apt to make financially smart decisions. The institution being accountable to the customer will build and foster a relationship of being prepared and honesty. When an institution is honest and holds the customer accountable for actions that affect their productivity and their overall operation the customer will be aided in making smarter financially decisions.
Honesty will also allow for a more open line of communication between the institution and the customer. When a relationship is built on honesty, those involved feel as though they can express themselves truthfully and in a way that will foster a stronger relationship. The stronger the relationship between an institution and the customer the more productive they both will be.
Finally, it is important for institutions moving into the New Year to being determining how they can assist their customers in being ready for farm and ranch loan renewal season. Empowering the customers will help the institutions to have a stronger feeling of sustainability in their portfolio and ensure customers are starting the New Year on a solid footing.